The old plant has limited capabilities in both, producing asbestos-related products and reducing the critical asbestos dust exposure. On the contrary, the new plant provides
the necessary equipment needed to reduce the asbestos exposure, a new liquid filtration system and relevant testing equipment. Most of the asbestos processing took place in this plant. As a result, the new production plant provided a cleaner environment as well as more scheduling flexibility.
The information provided by the case study indicates that the Fabrication Division was only marginally profitable. However, the contribution of products containing asbestos was significant and loss of the asbestos business would have an enormously negative influence not just on the Fabrication Division but also on other divisions within the company. Therefore, an assumption can be made that the Fabrication Division is an essential Strategic Business Unit, which is important for the whole company.
2.2 Attitudes and Risks Associated with Asbestos
The case study presents different opinions and attitudes regarding asbestos and its health risks associated with the working environment. In the following section a separate insight and analysis into the opinions of the company, its workers, customers and government will be provided.
2.2.1 Company
The company did all it could to protect the workers from the exposure of asbestos. Workers were obliged to wear protective gear including masks and overalls. In addition, regular health inspections on the workers were carried out. This strengthened the belief that everything was done to comply with government rules and to create a protective working environment. Despite these implemented measures, Barlow had the impression that not enough was done to protect the health of the workers and their families.
2.2.2 Workers
The general awareness of the dangers of asbestos was not very high. Workers compared the inhaling risks of asbestos to smoking and thought that there couldn’t be done that much anyway. This belief was undermined by the results of medical records of retired and dead workers, whose post-mortems didn’t show any signs of asbestos as the cause of death. However these inspections were conducted in a time span of the last 20 years, although it was said that asbestos related diseases could appear after 20 to 30 years of exposure. Workers were further annoyed by too many ridiculous government regulations at that time and therefore did not take the danger of asbestos serious enough.
Although most of the workers had relaxed opinions about the risks associated with inhaling asbestos, one can assume that they would sue the company in case of contracting any asbestos related disease. Families of affected workers would probably take the same action against the company.
2.2.3 Customers
Customers’ primarily concern was that products were becoming more expensive and harder to obtain. Further they did not show concern about the health risks involved because they did not directly get in touch with asbestos.
A guaranteed risk free working environment for the Cumberland employees would sooner or later drive prices upwards and would inevitably confront customers with this issue. As a consequence of this, customers would probably be reluctant to pay more for the asbestos related products; therefore it would be necessary to create an awareness of the health risks involved in the production of these products.
2.2.4 Government
Generally speaking one can say that before 1972 there was legally no need to follow any exposure advises for asbestos, given by the “American Conference of Governmental Hygienists”. Since nothing was legally enforced before this year, companies, including Cumberland, did not show much (if any) concern about this matter. Nevertheless, the privately funded organisation (ACGH) introduced the topic of asbestos to the public. In 1972 a minimum exposure standard of five 5-micron fibres per cubic centimetre was adopted. Later in 1975 a 2-fiber standard evolved, and in 1977 OSHA proposed a limit of one-half 5-micron fibre per cubic centimetres of air in an 8-hour period. In the short span of 5 years the standards for asbestos exposure became stringent to a very low limit of asbestos exposure and it was intended by the government to strengthen these rules even further. This clearly indicates that the government started to care about this topic.
The case study indicates that trade unions as well as the OSHA did put pressure on the government to come up with harder regulations and to adopt new standards. Consequently, growing pressure and concern about health risks could lead to the adoption of stricter rules.
2.3 Products
The Cumberland Gasket Company Inc. specialises in the manufacturing of various products that are designed to meet the needs of two significant industries:
- Products developed for the automotive industry (produced in the Michigan and California plants), and
- Products designed for the petroleum processing equipment (produced in the Maryland plant).
Some products manufactured by the Maryland Division were asbestos-related and they accounted for about 15% of the total division sales. It is important to note that the asbestos-based products were of significant importance to the oil industry and the company’s failure to provide the asbestos products could disrupt the supply chain of the industry. As a consequence, this would exert negative influence on the entire petroleum industry and most likely on other related industries.
Since the Maryland Division was offering both, asbestos and non-asbestos related products for the oil processing industry, it created perfect conditions for “one-stop shopping” for its clients creating a joint demand for its products. In another words, a client purchasing washers and gaskets will consider buying other related components provided by the company. By buying multiple products from one supplier the buyer is likely to strengthen the partnership between the two parties, as well as, decrease its costs associated with proportioning the requirements among different suppliers.
2.3.1 Asbestos-based products
The consumer market affects directly and/or indirectly the business market. Therefore, a comprehensive analysis of the economics of both, consumer and business market is needed in order to determine which factors are influencing the market for Cumberland Gasket Company Inc products. The following section represents an insight into specific conditions affecting the demand and supply of the asbestos-based products as well as possible influence on the market.
Asbestos is a mineral with specific and characteristics such as heat and fire imperviousness that are of essential importance to various industries and the manufacturing of a wide array of consumer products. The necessity for asbestos is drawn from the derived demand and its so-called acceleration principle – that is, demand for a certain product not only has a significant impact on the supply of that product, but further, it has a significant impact on the demand for various products, such as raw materials, components and equipment, as well as services, associated with the manufacturing of the final product. For example: demand for consumer electronics will affect the demand for electronic insulation, which in turn will have an impact on the production and demand for asbestos. Another example of derived demand can be found in the automotive industry in the manufacturing of brake linings, where the demand for asbestos is very high.
When analysing the concept of derived demand in the light of asbestos-related products, one can observe the function and effects of price volatility – that is, the strong relation of demand to supply. The shortage of asbestos could lead to increased competition among various buyers over the existing products or timely delivery, which in turn will drive the asbestos price upwards. The above notion of price volatility perfectly relates to the asbestos-based products market described in the Cumberland Gasket Company Inc. case study. During Cumberland’s operation the market for asbestos-based products had a low number of companies competing in the market. At that time there were only 2 companies (Cumberland Gaskets and another company) that supplied asbestos products to the market. As the demand grew for asbestos-products both companies had difficulties in effectively supplying their customers with products. As a result, the limited number of manufacturers of asbestos-based products has created a situation were customers did not receive timely deliveries.
Further, with the automobile and petroleum industry undergoing a radical transformation combined with an increasing demand for various products, the demand for finished goods containing asbestos (pumps, valves, brake linings, electronic insulation, etc.) was expected to remain at the same level. Therefore, an effect of price
inelasticity is apparent, that is demand for asbestos will remain relatively constant despite the increase in price. In the case of Cumberland Gasket Company, due to fact that in 1977 the price of asbestos had increased by 16%, just six months after a 10% the demand for asbestos-based products remained constant. Although there was a dramatic increase in price for the raw material the demand was not influenced. However, if the price of oil processing machines increased (let’s assume) by 15% an assumption can be made that this would have an apparent influence on demand.
As previously mentioned, asbestos is a material that is essential for the manufacturing of various products, used by a wide array of industries and for consumer applications. In the past the health and environmental regulations imposed by the government on the use and exposure to asbestos in the manufacturing of products were relatively relaxed, but as time passed various studies proved significant health hazards associated with asbestos. As a result of these studies new and stringent regulations were imposed. Further, the introduction of strict regulations on the asbestos and asbestos-based manufacturers led to a situation were producers had to increase their costs associated with the maintenance and introduction of new equipment, as well as an increase in costs related to the protection of workers within their companies.
The effect of new and more stringent regulations imposed on the asbestos industry had further implications. Not only did the manufacturers of asbestos-based products had to increase their costs on workers and for the air testing and special cleaning programs, but also the new laws had a negative influence on the whole production - the production and supply of asbestos-related products became quite restricted. This further impacted the industry as clients were experiencing once again late deliveries. In the light of the above events the whole industry was looking for a new material that would be an adequate and efficient substitute. In relation to Cumberland Gasket Company, the firm was not capable and did not have the necessary resources to focus on the research and development of a substitute. Du Pont, a manufacturer of chemical based products, developed a substitute to asbestos that was four to five times more expensive and of inferior quality and for which buyers were not willing to pay. It is interesting to note that although an attempt was made to create a substitute, for some applications there is simply no effective substitute material for the asbestos. As a result, it is evident that the cross–elasticity of demand, that is, the degree of the price correlation between one product and its substitute, is quite low due to the lack of a substitute material for asbestos. The higher the number of substitute material available, the greater the cross-elasticity of demand for asbestos.
2.4 The Market
The Cumberland Gasket Company together with another company are the only producers and suppliers of the asbestos-based products. There were indications that another competitor would leave the market soon. From the information presented in the case study it is evident that these two companies are the only manufacturers of asbestos-based products and this clearly indicates that the industry is an oligopoly - that is, few manufacturers dominate the market. Due to the fact that there are a limited number of companies in the asbestos-based product market, it could be assumed that other industries, such as oil processing, are heavily depending on the products of Cumberland Gasket Company Inc. and their competitor. Further, in an event of a possible disruption of production and distribution of asbestos products, the prices for asbestos would increase (buyers driving the prices upwards by competing for timely delivery) and/or buyers may seek for an alternative supply source for asbestos, for example an international supplier (assurance for timely delivery would not be guaranteed).
As for the asbestos-based product market, this market is characterised by the presence of a few large companies and by 20 to 30 smaller buyers. This market can be
characterised as an oligopsony as it is dominated by a number of small buyers of asbestos-based products who might have a disproportionately affect on the market. In regards to the Cumberland Gasket Company Inc, the firm is dependent on these companies to make orders and final purchases of asbestos-based products. Since the market in which Cumberland Gasket Company Inc is an oligopoly the firm may find it hard to charge anything more than the going price unless it can differentiate its products. Since Cumberland’s competitor is most probably matching the firm’s products, Cumberland’s competitive advantage and attracting buyers should lie in achieving lower costs and improving delivery. These lower costs could be achieved through Cumberland’s pursuit of a higher volume strategy – mass production.
3. ALTERNATIVES
In the section that follows, a comprehensive insight into the possible alternatives that Mr. Barlow is faced with will be provided. The alternatives will be evaluated and arguments “for” and “against” each alternative will be presented.
3.1 First Alternative - Terminating the Production
The first alternative considered by Mr. Barlow was to terminate the asbestos-based production process. However this step would lead to a whole range of negative effects. First of all, there will be a considerable shortage of asbestos that would consequently lead to a disruption of the supply chain and will affect the oil processing industry. As a result this would have a negative impact on final consumers.
Secondly, opting for this alternative would mean major financial losses for the Cumberland Company and a reduction in its ability to successfully compete in the market. In addition the Fabrication Division was heavily depending on high margins gained from products containing asbestos, so this alternative would definitely jeopardise the profitability of other Cumberland divisions. The employees would be laid off unless a suitable substitute would be developed and adapted to the whole manufacturing process according to Cumberland’s resources. Finally, one could mention that the company would lose many valuable opportunities to expand their product range and business operations.
3.2 Second Alternative - Liquid Processing
This alternative would be to process all asbestos under water or other liquid. The new Cumberland plant was equipped with a special filtration system, which was designed to prevent any discharge into the river. Mr. Barlow at that time decided to invest into this filtration system and top management did not question this decision.
Due to the fact that asbestos is an absorbent material, product properties could change under the influence of water or any other liquid. This would require heavy research and property testing to find the perfect liquid in which asbestos could be processed without changing any of its essential properties. Huge investments had to be done to finance this research and a loss of time in the production of the products would be unavoidable. The under water processing would indeed eliminate the asbestos dust exposure but would create asbestos-bearing sludge. The sludge would most probably be dumped into the river (due to missing environmental regulations) what would result in pollution of the river itself and later in air pollution because if the sludge would be washed up on riverbanks and would dry out, asbestos could eventually enter the air.
The OSHA did not have any regulations at that time concerning the river pollution through asbestos-bearing sludge. Nevertheless one can assume that the government would set up certain regulations and that the pollution of the rivers could result in the payment of fines or in legal responsibility for the environment.
3.3 Third alternative - “White Room” Project
Finally, the third alternative that Mr. Barlow was considering was creating a “white room” that would involve isolating equipment used for making asbestos-based products from the rest of the plant. Further, employees working with asbestos would have to make changes to the clothing, shower before leaving the room as well as to use protective masks. Implementation of this project would require an investment of $750 000 and would increase annual operating costs by $100 000. The Maryland Division had $6 million worth assets used for producing the parts for the petroleum processing industry. In addition to the cost associated with creating an isolated environment for the manufacturing of asbestos-related products, the company could face under-utilisation of equipment since the machines would be only used with asbestos material about 30% to 40% of the time.
After taking into consideration various economical aspects, forces shaping the market, opportunities derived from the low competitor’s presence, government regulations, as well as associated costs, continuing the manufacturing of asbestos-based products with new investments for protective measures appears to be the best option for Cumberland Gasket Company Inc. The section below will provide an in-depth analysis of the mentioned above factors supporting the alternative of investing into the new working environment.
In the light of the discussion presented in section 2 of the report, (asbestos-based products) there is a strong demand for asbestos-based products and it is likely to stay constant. The demand for asbestos-based products is derived from the consumer demand for petroleum products, consumer electronics and other goods containing asbestos (the economic acceleration principle). As presented in the case study, the demand for asbestos-based products was not affected although the buyers of asbestos-based products were confronted with increased prices. Further, when considering alternative materials for asbestos a firm conclusion can be made that there is no effective substitute that could replace and match asbestos performance. As a result, Cumberland Gasket Company Inc is manufacturing products that are needed and scarce on the market and there will always be demand for asbestos-based products until a suitable substitute, which will be the same, or better than asbestos will be developed.
The market for asbestos-based products is composed out of several large and many smaller buyers. Their primary concerns lie with the price and the delivery time. Through the implementation of the new “white room” working environment the company will incur additional costs but in turn will improve the manufacturing process. As a consequence of new investment, a higher price for the products would be set. In order to justify the price increase the company would have to improve the delivery conditions to satisfy its clients. Further, Cumberland Gasket Company Inc. and its competitor are the only producers of asbestos-based products, which grants them a dominant position in the US market. However, this could change as the buyers of their products could always seek for an international supplier. An assumption could be formulated, and that is, if the clients decide to purchase from another company based out of the USA, then there is a possibility that their delivery conditions may not
be guaranteed and met by the new supplier (for example geographical distance or supplier’s shipping costs).
The case study indicates that another company will stop producing asbestos-based products and Cumberland Gasket Company Inc. will remain the only manufacturer on the market. In the light of this situation a conclusion could be made that demand for asbestos-based products will increase as there is a limited number of manufacturers on the market, more clients will approach the company to seek for the products, and as a result this will increase Cumberland Gasket Company’s profits. The company, providing favourable environmental conditions, may become the only manufacturer of asbestos-based products and having a full monopoly over the market. The company will gain the ability to fully exploit its production process and to fully benefit on the utilisation of its equipment. Cumberland Gasket Company Inc. competitive advantage would lay in the achievement of lowering costs and through a pursuit of a higher volume strategy – in other words, mass production.
Since the other two plants in Michigan and California are focusing on the production of parts for the automotive industry there may lay an opportunity for the company to extend its product range and to engage in production of brake linings. It is important to note that there is no-known substitute for asbestos in the production of automotive brake linings. Extending the product range will enable Cumberland Gasket Company Inc. to offer “one stop shop” for buyers of automotive parts.
Finally, when observing the costs of implementing a “white room” working environment one has to take into consideration the following factors: investment and operating costs. If the new project is being implemented the company’s assets will increase by the amount of $750 000 bringing the total assets to $6,75 million. The Maryland Division had sales amounting to $20 million and approximately 15% of the Division’s sales were from products containing asbestos – what is $3 million. By observing Sales/Assets ratio it is possible to determine how well assets were used in the past as well as how they will be used in the future. The analysis of the past performance shows that for $1 dollar invested into the assets for the production of asbestos-based products, a $0.5 return was produced (Sales/Assets: $3 mill/$6 mill = $0,5). Investing into the new facility will produce a different ratio and if the sales stay constant the return would be slightly lower $0,44 (Sales/Assets: $3 mill/$6,75 mill = $0,44). However, an assumption can be made that, the sales will not remain on the same level and they will increase since Cumberland Gasket Company Inc competitor will leave the market. As mentioned earlier, the company will gain the ability to fully utilise the equipment and its production process in order to reach the economies of scale. For example by increasing the sales by 20% the return would be $0,53. Furthermore, the operating costs of $100 000 will be spread over a higher number of units produced meaning that these costs would not significantly influence the price.
4. CONCLUSIONS
The primary purpose of this report was to analyse the alternatives that were presented to Cumberland Gasket Company Inc. in relation to the future operations of the company and the production of asbestos-based products. Three alternatives were considered in order to find out and employ the best solution for Cumberland Gaskets Company that would allow the company to continue and expand a successful business operation in the asbestos product industry.
After a comprehensive analysis of various factors that have had a significant impact on the asbestos-based product industry, as well as factor that influenced the company itself, a decision was made that Cumberland Gasket Company Inc should pursue the production of asbestos-based products through significant investment into a new isolated working environment called the “white room”. There are many reasons for this. First, there are many opportunities provided by the economical conditions that the asbestos industry has to provide to the company. The favourable economic conditions surrounding the company such as the presence of a positive derived demand for asbestos related products, lack of a substitute for asbestos, as well as the existence of low competition in the market creates a clear situation where Cumberland Gasket Company Inc. is an obvious winner. Cumberland Gasket Company Inc. should continue its operations as the demand for asbestos-related products is continuous and most probably will remain stable in the future. An attempt to develop a suitable substitute for asbestos resulted in a failure, hence till today asbestos still remains a much needed and required substance for the manufacturing of various products, which are needed for everyday life. Further, the presence of a very low competition in the asbestos-based product market creates a situation where there is no threat being imposed on the position of Cumberland Gasket Company Inc. in the market.
Secondly, terminating the production of the asbestos-based products would inevitably damage Cumberland Gasket Company’s Inc. ability to efficiently compete in the market and would jeopardise the company’s existence and well being. It is evident from the case study that as time passed the government has been enforcing severe regulations and laws concerning the maximum amount of exposure to asbestos. There was also continuous pressure on the government by various groups to strengthen the rules even further in order to protect employees working with asbestos. In the light of the past events that took place in the legal system it could be assumed that the government would continuously impose more stringent rules and regulations on asbestos related business. Therefore, for Cumberland Gasket Company in order to operate successfully and prosper, the company has to accept, enforce and comply with the new health regulations imposed by the government. By structuring the “white room” the company will provide a new working environment, which would mean a full compliance with the health rules, as well as, providing a greater health protection for the workers and their families.
5. RECOMMENDATIONS
In order to successfully implement the new working environment the following courses of action could be recommended to the vice president of Maryland Division Mr. Fred Barlow:
Presenting the benefits of implementing the “white room” working environment could influence the company’s current policy in regards to capital investments. Obviously, the primary concern of the company’s shareholders and investors would be their return on invested resources. As presented earlier in the report, Cumberland Gasket Company Inc would soon become the only producer of asbestos-based products. Consequently, the company would receive more orders for its products and will be able to reach the economy of scale through mass production. Therefore the Sales/Assets ratio would be more favourable for the shareholders and investors.
Awareness regarding the health risk associated with exposure to asbestos should be strongly implemented among the employees as well as the clients. It should be clear to the employees working with asbestos that measures taken by the company are of the extreme importance for their health and consequently for the health of their families. On the other hand, clients when visiting the Maryland Division should also been introduced to and informed about the process of manufacturing products containing asbestos. This will strengthen the relationship between the company and the client and further it will provide clients with deeper understanding of the costs involved in the production of asbestos-based products. Implementing the new working environment would improve the production process, and if the product’s price increases (as a result of the implementation of the new working environment), then the company should take measures to compensate the price increase by improving delivery conditions.
Cumberland Gasket Company Inc by investing into a safer working environment would have an opportunity to create a positive corporate image. Through the introduction of the “white room” the public would perceive the company as a responsible corporation that takes care of its employees and the environment.
Finally, since the “white room” project would be implemented in Maryland’s new plan there is a possibility to transfer the asbestos-based products production from the old plant and create a department that would be responsible for the manufacturing of products containing asbestos. The new plant has much more advanced equipment that would reduce the exposure to asbestos; it has a special filtration system, as well as an air controlling equipment. Through carrying out the production of asbestos-based products on one location instead of two the company could achieve the following: reduce its costs in manufacturing and effectively utilise on the equipment by combining the production, and provide a safe working environment for its employees.
